Friday, February 13, 2009

Microsoft (MSFT) Dividend Stock Analysis

(This article originally appeared on The DIV-Net January 23, 2009.)

Microsoft Corporation provides software products for computing devices worldwide.

Microsoft is a major component of the S&P 500, Dow Industrials and Nasdaq 100 indexes. Microsoft has been consistently increasing its dividends since 2003. From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 3.90 % to its shareholders.

At the same time company has managed to deliver a 11.30% average annual increase in its EPS since 1999.
The ROE has decreased from a high in 1999 at 36% to 12% in 2003, before recovering strongly to over 50% in 2008.
After a long history of technological innovation, Microsoft showed signs of maturing as a company when it initiated a dividend policy in 2003. Annual dividend payments have increased by an average of 41.60% annually since 2003, which is much higher than the growth in EPS. The past three years have shown annual increases of 12,11 and 15% respectively. I would expect MSFT to increase its dividends by 10% over the next five years, until it reaches a dividend achiever status.
An 10% growth in dividends translates into the dividend payment doubling almost every seven years. Since 2003 MSFT has actually managed to increase its dividend payment over five times.
The dividend payout has remained below 30% for the majority of our study period. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

I think that MSFT is attractively valued with its low price/earnings multiple of 9.5, and a low DPR. However the current dividend yield is below the 3% minimum threshold that I have set. Another threshold would be to wait and see if MSFT could actually achieve a dividend achiever status. As a value holding MSFT is a buy on dips below $17. As a dividend growth stock, it might take several years to fully mature. Once it does however, MSFT will probably be the premiere tech holding for dedicated dividend investors.

Relevant Articles:
- Dividend Yields for major US indexes
- My Dividend Growth Plan - Stock Selection
- AT&T (T) Dividend Analysis
-My Dividend Growth Plan - Diversification

4 comments:

  1. I remember when MSFT first announced their dividend. It was a big deal for a tech company! I have a number of friends who work for MSFT and they are definitely a very established company. Maybe I'll pick up some shares if they dip below $17.

    ReplyDelete
  2. MSFT in deflationary environment is a very risky move. Moreover, it became too big and inefficient. Businesses and individual alike are cutting back on spending. Don't see how it can be beneficial for the stock and its owners.

    ReplyDelete
  3. Anon,

    MSFT has a moat at least for the next 5-10 years. The company is THE software provider for the majority of PC market. It costs them next to nothing to just create a CD with Windows and just ship it. I like the fact that the company is generating billions in cash flow every quarter, which is something few companies have.
    I see their biggest risk in wasting their cash positions on projects such as XBOX and other risky ventures.

    ReplyDelete

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